Commentary

Newspaper Publishers Face Less Risk Of Default, Though Worries Remain

Newspaper publishers face less risk of default than they did as recently as two months ago, when investors panicked over the coronavirus pandemic and its likely effect on the U.S. economy.

The industry still faces enormous uncertainty, but a recent report by S&P Global Market Intelligenceis somewhat reassuring in describing how publishers have taken steps to reduce the likelihood of bankruptcy.

The reduced risk is a sign of how the pandemic isn't a "black swan" event for investors any longer, to borrow a metaphor to describe something that's a complete surprise.  Instead, the coronavirus has become another metaphor, "the devil we know," or a threat that's predictable.

Based on everything investors know about the outlook for publishers, they have determined that companies like Gannett Co., The New York Times Co., News Corp. and Tribune Publishing Co. are less likely to go bankrupt in the next year.

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Gannett is the most notable example, with a default risk that surged to almost 60% in early April from about 25% in late February -- about the time the U.S. stock market was hitting record highs. That risk subsided to about 38% last week, which is still elevated, according to S&P. Its risk assessment is based on stock volatility, geography and industry risks.

Faced with significant declines in advertising and event revenue because of the pandemic, Gannett took steps to save about $100 million to $125 million this year. Unfortunately, that included layoffs and furloughs, pay cuts for senior management and suspension of nonessential travel and spending.

The company this month must make an interest payment of about $125 million to hedge fund Apollo Capital Management LP, which provided financing for Gannett's merger with GateHouse Media LLC parent New Media Investment Group Inc.

Gannett's risk profile will dramatically improve with a recovery in ad spending. It's too early to expect a rebound during the slower summer months, and more businesses need to be allowed to re-open. The economy isn't going to grow again until we see a "virtuous cycle" of people getting back to work and having more money to spend.

That process that will require more fiscal and monetary stimulus, along with more incentives for businesses to expand. As consumer demand rebounds, publishers will have more opportunities to boost revenue.

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